Company note 27 November 2015

JSMR IJ / JSMR.JK | ADD – Maintained | Rp4,810.00 tp:Rp7,600.00▲

Mkt.Cap:US$2,380.00m | Avg.Daily Vol:US$2.13m | Free Float:30.00%

Author(s):Erindra KRISNAWAN, CFA +62 (21) 30061732, Laura TASLIM

■ 10M15 traffic growth of 4.5% above our forecast; maintain 2016 traffic growth of 3.8% and 11% revenue growth forecasts
■ The establishment of PT Jasa Layanan Operasi (JLO) positive; more manageable salary inflation in the future
■ Planned government equity injection will be cashflow-supportive. Regardless, balance sheet capacity for debt funding remains
■ DCF-based target price rises to Rp7,600 as we roll forward our valuation period

Steady traffic growth; tariff hike to support 2016 revenue
Oct 15 traffic growth of 121.5m brought 10M15 overall traffic to 1,136m (+4.5% yoy), ahead of our forecast. We maintain our forecast of 3.8% traffic growth in 2016. While cost remains the potential wildcard for earnings going forward (particularly given the expensing of capitalised interest from projects), we expect 11% growth in revenue, driven by the 9-15% tariff increase (in Nov 15) for 13 main roads, to drive 11% earnings growth in 2016.

A more predictable salary inflation

Following the Aug 15 formation of JLO, a new subsidiary to handle the manpower for its toll road operation and maintenance, JSMR transferred all 2,713 existing outsourced employees (i.e. 37% of its total employe of 7,335) to JLO. We expect this to result in a more predictable profile of salary cost (11% yoy in 9M15) as it lessens the exposure to any scenarios of higher-than-normal minimum wage rate hike.

Government’s capital injection still expected
Despite the delayed approval of the government’s capital injection into SOEs, JSMR still expects to receive Rp1.25tr in government injection in 2016. In our view, the 37.6km Pandaan-Malang project (currently still in tender process and hence not in our projection yet) should fit the funding profile. In the event of no government injection, we think JSMR’s current net gearing of 1.1x should still allow for debt funding, though the risk could rest on cash flow availability for the project’s equity funding.

Government intervention is a headline risk
Risks from government intervention (eg, mandatory tariff discount during Eid Fitri holiday) has been a highlight in 2015. Though there is no guarantee that this will not re-emerge in 2016, the timely tariff adjustment in Nov. 15 should allay concerns on overall project returns. Our recent meeting with the tollroad regulator (BPJT) also indicated positive signal of the government’s willingness to compensate for project returns in the event of holiday discounts or tariff hike delay.

Growth and project returns intact
At current 23x 2016 P/E, we maintain Add rating on attractive long-term growth (20% earnings 7-year CAGR), driven by the six concessions (387km) under construction that should be operational in 2016-2024. This is also backed by the in-line recent project’s IRRs of 14%-18% based on our estimation.


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